Staples Turnaround Is Underway: Take Notice or Be Clipped

Yesterday was quarterly earnings time again for office supply superstore Staples (NASDAQ: SPLS) , which often means only one thing for shareholders -- duck and cover.

Staples didn't disappoint short-sellers, with revenue coming in about $140 million below estimates, at $6.57 billion, despite adjusted EPS of $0.46 slightly surpassing Wall Street's estimates. The more damaging blow came from management's 2013 guidance that called for $23.9 billion in revenue, and EPS in the range of $1.30-$1.35. Current Wall Street estimates prior to this report had been forecasting revenue of $24.3 billion on $1.44 in EPS. That's right folks -- another earnings shortfall from Staples.

Meet the new Staples Yet, I couldn't be happier, because a turnaround at Staples is fully under way, and the company's bottom line has hardly blinked because of it. Short-sellers can focus on these weak results if they'd like to, but they're likely to be "stapled" if they don't take notice of the catalysts that could drive Staples higher.

To begin with, Staples is proactively cutting costs by closing larger underperforming European and U.S. locations and turning its focus to smaller, mobile-focused stores and applications. Its plan is modeled very similarly to Best Buy (NYSE: BBY) , which is itself closing 50 of its bigger stores in favor of opening 100 smaller mobile-focused locations. Although margins on electronics are going to be smaller than office supply products, the simple fact that Staples can draw customers into its stores could create secondary sales.

In addition, Staples, between its stores and direct-to-marketing services, will be carrying a full line of Apple (NASDAQ: AAPL) accessories by the end of this month. Staples has carried Apple accessories in its international markets for a while, but this marks the company's first U.S. deal with Apple. It's notable because the majority of Staples' exposure is still in the U.S., giving the company a huge potential to drive traffic. Most Staples stores aren't located near malls, which gives the consumer looking for a convenient Apple products solution all the more reason to head to their local Staples.

Another key point worth noting is the expected benefit Staples should experience from the pending purchase of OfficeMax (NYSE: OMX) by Office Depot (NASDAQ: ODP) . You might think it counterintuitive to assume that a merger of the No. 2 and No. 3 in the office supply sector would make things more difficult for Staples, when, in reality it'll be just the boon it needs to steal market share and grow domestic sales. The Office Depot/OfficeMax merger is likely to result in store closures and merger-related hiccups that will leave Staples in prime position to pick up new customers.

Investors would be foolish (with a small 'f') to ignore Staples' shareholder incentives, as well. In spite of accounting for store closures and paying down its debt, Staples still delivered $870 million in free cash in 2012, of which $449 million went for share repurchases, and $294 million was returned to shareholders through dividends. In 2013, Staples is forecasting $900 million in free cash flow, and just yesterday, it boosted its quarterly payout by 9%, to $0.12, for a new annual yield of 3.9%.

Stand in Staples' way at your own peril In short, Staples is still an incredibly profitable cash cow that's making all of the right moves to drive traffic into its stores and to its online site, and is rewarding shareholders with bigger payouts and continued share repurchases as it gets back on its feet. As part of my One Person's Trash Is Another Person's Treasure portfolio, I feel quite strongly that Staples is headed higher, and any further downside may pre-empt me to take a real-money position as the Fool's disclosure policy allows.

Can this retailer turn things around?The brick-and-mortar versus e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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